Angel Investors Have a Benevolent History
Angel investors have a long and familiar history along the Great White Way where they originated. When a Broadway show was in need of the capital to produce a show, angel investors were there to literally help get the show on the road.
There was a bit of benevolence in this behavior, considering the gamble.
The desire was in preserving the artistry of the theater. If a show hit it big, there was the potential for a huge return.
This still holds true today, however, many of the aspects have changed.
The Prospect of Investing is a Collective Effort
Similarly, businesses today are turning more to angel investors than to venture capitalists (VCs) for their funding. In 2012, there were 50,000 companies started with the help of angel investor seed capital versus only the 600 financed by VCs. These figures are stunning.
Angels help to contribute to the nation’s GNP and have accounted for 65 percent of net new jobs over the previous two decades. Typically, with the level of research to determine if the risk is a good gamble, the investors have personal ties and expertise in the area in which they are contributing their wealth. Angels extend their professional knowledge contributing to the success of the company in which they are investing more than just money. This brings us to taking a closer look to understand how angel investing works.
The Way Angel Investing Works
Apples to apples, angel investors are contributing sums that amass from the tens of thousands into the millions whereas VCs tend not to approach a proposition that falls below one to two million, at least. What this means is that while the process of obtaining capital is not easy, there are far more angels to be found who are prepared to infuse capital into start-ups to make a go of each carefully selected venture. In fact, angels must meet the definition of accredited investors as established by the Securities and Exchange Commission (SEC). Each angel is required to have a minimum net worth of $1 million with an annual income of $200,000 individually or $300,000 jointly with a spouse.
Angels, whether acting alone or as part of an angel group, perform their due diligence in researching each proposal. Entrepreneurs are expected to present their business plan, financial status, executive summary and investor presentation. Angels are more likely to have many irons on the fire, so to speak, in order to maintain a healthy portfolio.
For the angels, there is a commitment of time when it comes to sitting in on the screening process, attending events and networking with their group. Further, they may be required to commit to an annual investment. The goal of the angel investor is to be active in their propositions. To increase the odds of their ROI, they work to gain access to quality deals. Angels could be people operating their own businesses or retired person with the desire to remain actively participating in the business markets with which they are familiar.
It is not Free Money: It Comes with Trade-offs
For a venture looking for funds from angel investors, some questions you should ask yourself before accepting the proposition are:
- How would you feel about giving up a degree of control over your own business?
- Are you capable of demonstrating a significant ROI to satisfy investors?
- Are you prepared to receive the advice and guidance from investors?
- Are you willing to accept that the board of directors may differ with you on business decisions?
- Do you have an awareness of and therefore a plan for an exit strategy in as few as three or as many as seven years into the business?
- Are you prepared to accept the input from professional willing to mentor you for the benefit of all concerned?
Your ability to distinguish yourself as open to the possibilities of what angels can extend beyond their financial support will help your pitch. The goal, after all, is to make a go of your venture, to make it a financial success and, in all likelihood, prepare it for the next round of capital or ultimately a possible acquisition.
What are the Resources for Business Owners Looking for Angel Investors?
Search out members in good standing affiliated with the Angel Capital Association (ACA), the leading professional and trade association that supports the success of angel investors in high-growth, early-stage ventures. According to the ACA, there are more than 330 groups made up of thousands of individual investors throughout the United States and Canada actively investing in start-ups in the community.
Further, there are industry associations, chambers of commerce, local trade groups, referrals from investors’ trusted sources, investor conferences and business contacts who may all be useful connections to angel investors. The goal is to become a part of the meetings organized by angel investor groups where companies are allowed the opportunity to directly pitch their presentation face to face